Auditing and Assurance docx.

Auditing and Assurance
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Contents
Question 1: Inherent risk............................................................................................................3
Question 2: Control risk.............................................................................................................3
Question 3: Audit risk................................................................................................................4
Question 4: Analytical procedure...............................................................................................5
(5) Controls and test of control..................................................................................................5
References..................................................................................................................................7
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Question 1: Inherent risk
Inherent risk factors-
Inherent risk is defined as the risks that are associated with the conditions or situations which
are beyond control. Inherent risk identifies external risks that are not included or controlled
by internal controls (William Jr., Glover& Prawitt, 2016). In the present case, the following
are an inherent risk for the occurrence assertion of sales revenue for Hamilton Limited:
Accessibility of the accounting records: After analysing the process of sales (i.e. from
beginning till completion) it is found that credentials of sales transactions are easily available
with all departments. Since the recording of sales transactions has all information it can be
easily altered, tampered and misstated in accounting records. Accessibility of the accounting
records will increase the inherent risk of misstatements of the sales revenue.
The complexity of accounting system: Accounting system can be defined as the system that
needs to be followed to record transactions. Another issue is related to complexities involved
in the accounting system of Hamilton Limited. Management has put adequate measures for
better internal controls but they have made accounting system bit complex (Knechel&
Salterio, 2016).
From the analysis of the inherent risk of Hamilton Limited, it can be concluded that there will
be a high level of inherent risk in a business environment. An auditor needs to keep into
account above-mentioned factors while auditing the sales revenue and need to use many audit
measures.
Question 2: Control risk
Control risk in an audit can be defined as the risk associate with the internal process or
business process of any business organisation. Control risk identifies how much to rely on
internal controls employed or adopted by the business organisation (William Jr., Glover&
Prawitt, 2016). If the level of reliability is higher than control risk will be lower and vice-
versa.
Control risk-
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